Cianci says “The trend toward LED lighting for energy efficiency will move more quickly this year than anyone expects, driven by cost declines, regulatory incentives and rapidly increasing consumer awareness.” He thinks the place to be is Organic LEDs (OLEDs), and thinks OLED research and intellectual property license shop Universal Display Corp. (NASD:PANL) “Could double from here. The launch of OLED TVs will complement rapid growth in smartphone and tablet screens. PANL is a high margin royalty play on all of this surface ‘real estate’. Everyone will want an OLED screen as the costs come down.”

Rafael Coven: Building Momentum

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven expects “Stronger momentum into LED Lighting especially as the economics improve enough that it can start really challenging replacing T8, T5, and other fluorescent lighting applications. This should help LED manufacturers such as Cree (NASD:CREE), Philips (NYSE:PHG), and component makers such as Advanced Energy Industries (NASD:AEIS) and Rubicon (NASD:RBCN) but really punish the old line lighting companies that haven’t kept up in the space such as Siemens (NYSE:SI) and General Electric (NYSE:GE), among others.”

Jan Schalkwijk: A Cyclical Bottom

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk thinks the adoption of LED lighting has yet to take off, but he sees its acceleration will help Veeco Instruments (NASD:VECO.) Veeco makes LED manufacturing equipment tools, and he thinks it is currently cheap because “A pending reassessment of revenue timing has delayed its quarterly filing, and orders last quarter came in low. The latter I believe is more a cyclical bottoming out than an indication of poor future orders.”

He adds a note of caution, saying Veeco is volatile and “Wall Street does not always know what to make of it.”

Bottom Line

The future of LEDs is bright, and these three experts think 2013 could be the year when they really take off. I tend to be cautious when there seems to be an investment concensus for a sector, because it means that the stocks are unlikely to be cheap. That’s certainly true for Cianci’s pick PANL, which trades for 32 times expected 2013 earnings. Analysts’ prediction of 25% expected growth over the next five years isn’t enough to justify that valuation.

Even while Schalkwijk’s Veeco is trading 22% off its 2012 high because of the uncertainty surrounding the stock, it’s still priced at 22 times expected 2013 earnings. That might seem a relative bargain compared to PANL, but not if you believe analysts’ predictions that the company will shrink an average of 4.6% for each of the next five years.

To own either of these stocks, you need to believe that Cianci is right and LEDs will light up “faster than anyone expects.” For “anyone” read “most other investors,” and hope that the investor who sells the stock to you is one of the most surprised.

Disclosure: I have no position in any of the stocks mentioned. Green Science Partners owns PANL and Schalkwijk and his clients own VECO.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.